Involuntary Bankruptcy 101

Some folks might think they can get out of debt by simply dodging a creditor, but unfortunately, it’s not that easy. Fortunately for these creditors, there’s a legal proceeding they can use against elusive debtors to protect their own interests: involuntary bankruptcy.

Involuntary bankruptcy is exactly what it sounds like. Essentially, it’s when a creditor requests an individual or business to go into bankruptcy over debts that the debtor has refused to pay. However, the creditor must find a legal requirement for this request to be approved.

How It Works

The key difference between involuntary and voluntary bankruptcy is that a creditor files for bankruptcy on the debtor’s behalf in the former case, whereas the debtor files for bankruptcy themselves in the latter.

Title 11 of the U.S. Bankruptcy Code allows petitioning creditors to file an involuntary petition, or a petition that lists the legal requirements the creditor must satisfy to proceed with the involuntary bankruptcy case.

Interestingly, involuntary bankruptcy cases are primarily filed against businesses. While they can also be filed against individuals, it’s quite rare given that individuals have far fewer recoverable assets than businesses. Involuntary bankruptcy cases cannot, however, be filed against banks, credit unions, insurance companies, non-profit organizations, and farmers.

Furthermore, only Chapters 7 and 11 of the U.S. Bankruptcy Code allows for the filing of involuntary bankruptcy, meaning it’s ineligible under Chapters 12 and 13.

So what are some of the legal requirements a creditor must meet to file for involuntary bankruptcy?

First, the total debts owed must exceed $16,750, and the creditor must prove that the debtor is repeatedly refusing to pay these debts, despite having the financial means to do so.

However, this can be a little difficult to prove in court. Thus, the court will review details like how many delinquencies they currently owe, why they are refusing to pay, and their general financial history, to name a few.

Second, this involuntary petition must be filed by a single active creditor if the debtor has less than 12 active creditors. If the debtor has more than 12 active creditors, then three of them must jointly file this involuntary petition.

Moreover, the debtor has 21 days to respond to the initial petition before the bankruptcy proceedings begin. Failure to respond or a court ruling in favor of the creditors allows for the entering of an order of relief, whereupon the debtor is placed into bankruptcy. Debtors can also petition to convert this petition from an involuntary bankruptcy to a voluntary bankruptcy case.

The good news is that a bankruptcy declaration–be it voluntary or involuntary–is not the end of the road. For many, it can be a fresh start, but only if it’s done with the help of prudent, experienced bankruptcy lawyers. Fortunately, our team here at Maxwell Dunn, PLC has the courtroom experience and extensive bankruptcy law knowledge to help fight for what you deserve. To learn more about our services, call us today at 248-246-1166.